January 26, 2012

The Cost of Care

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It is well known that healthcare costs are extremely high in the United States. When lamenting these costs, however, we often fail to distinguish between individual costs and national expenditures: While both may be “high,” each is subject to different influences. The two can be linked in the aggregate, but recognizing these differences is crucial as the current and future generations of healthcare providers and policymakers work together to bring these costs under control.

One reason for high individual costs, known as out-of-pocket costs, briefly reads as follows: Suppose a hospital treats two patients, each of whom receives exactly the same care, but one is insured and one is not. For simplicity’s sake, let us assume that the insured patient pays nothing out of pocket and the uninsured patient pays fully out of pocket. In order to expand its patient population, the hospital has an agreement with the insurance company that they will be listed as an “in-network,” pre-approved provider for the insurance plan, in exchange for which the hospital will discount costs charged to that company, say by 25 percent. If the procedure these patients receive costs $100, the hospital would recoup only $75 from the insured patient. Therefore, to make up the difference, they must charge the uninsured patient $125. That may not sound so bad, but there is more to consider.

Even prior to the recent health reform legislation, more people were insured in America than were uninsured. In September 2010, the Census Bureau reported that 16.7 percent of Americans were uninsured, for a ratio of insured to uninsured of approximately 6:1. Now let’s look at our original procedure costs again: With seven patients — six insured and one uninsured — the total cost to the hospital is $700. But the first 6 patients account for only $450 — $75 times six — in revenue. That means our last uninsured patient is on the hook for $250 for a $100 procedure. Put another way, that’s a 150 percent increase in cost. Keep in mind that with the baby boomer generation reaching retirement age, a larger proportion of the population gets their insurance through Medicare, which often reimburses at rates far lower than private insurance companies. This further compounds the problems illustrated above.

Another factor contributing to both higher individual costs and poorer outcomes is a direct result of our healthcare system’s structure. The U.S. employs what is known as a “dispersed” system — as opposed to a “regionalized” system seen in the U.K. One of the basic features of a dispersed healthcare system involves multiple hospitals in a given area competing with one another for patients, revenues, reputation, etc. Each hospital is driven to offer the newest technologies, the best doctors, the most specialties and the most procedures under one roof. All of these components of care cost money — lots of money. These costs are passed on to patients in the form of higher procedural fees. Additionally, with multiple hospitals competing for the same patients, the system fails to take advantage of economies of scale, which in turn leads to worse outcomes for patients.

For example, let us imagine a region served by four hospitals in which there are 1,000 patients in need of an appendectomy each year. If the hospitals compete effectively we can assume a roughly equal distribution of patients choosing each one, meaning each hospital has a surgeon who performs 250 appendectomies yearly. If, on the other hand, every appendectomy were performed at a single hospital by one or two surgeons, that surgical team would have far more experience with the procedure, leading to better outcomes for appendectomy patients. Overhead costs of the procedure would also be significantly less, as the hospital would not need to pay four surgical teams or host four operating rooms to care for the same net number of patients.

Two other factors inflating healthcare expenditures across the board are an increasingly prevalent culture of defensive medicine and a lack of national focus on preventive care. As our society becomes increasingly litigious, the costs of medical malpractice insurance have skyrocketed, placing further financial pressures on physicians and hospitals, which compensate in part by increasing costs to patients. The distribution of healthcare spending in the United States, a reflection of our national healthcare priorities, is also partly to blame. Nearly all of our financial focus is on curative and chronic medicine, terms which in this context refer to care provided in response to illness or injury. These interactions account for approximately 97 percent of all healthcare dollars spent in this country. Preventive public health programs, by contrast, garner only about 3 percent of spending. In an age when 40 percent of deaths in America are classified as preventable — ie., tobacco-related cancers and heart disease, obesity, type II diabetes, etc. — this represents an incredibly negligent appropriation of limited resources.

Finally, the last century has seen huge advances in medical treatment and education. Better imaging technologies, safer surgical procedures and the advent of countless powerful drugs are a testament to this progress. Unfortunately, we have reached a point where our ability to extend life has in some cases far outpaced our ability to maintain quality of life. Many physicians in fact prefer that no extraordinary measures be taken to keep them alive in the event of catastrophic illness or injury. Among the reasons for this phenomenon is the extremely low quality of life for many patients in these situations, kept alive by technologies such as respirators, hemofiltration and frequent invasive resuscitation efforts. And these last-ditch life-extension efforts are not cheap: One quarter of all Medicare expenditures occur in the last six months of life. By investing significantly in preventive and palliative medicine, health education, and access-to-care programs, we can improve quality of later life while decreasing healthcare expenditures.

The reasons why we as individuals and we as a country spend so much money on healthcare are complex. Current efforts to stem the rise of costs include introducing new reimbursement schemes for hospitals and providers, imposing penalties for substandard care and high readmission rates and placing a greater emphasis on medical homes and accountable care organizations. Still, it is important to note that many of these innovations are aimed at slowing the increases in healthcare spending, rather than reducing costs overall. While it remains to be seen exactly what effects recent reforms will have, the healthcare landscape of the future is certain to be markedly different from the one we know today.

Justin Granstein graduated from Cornell in 2010 and is a first-year medical student at Weill Cornell Medical College. He may be reached at jug2019@med.cornell.edu. What’s Up, Doc? appears alternate Fridays this semester.

Original Author: Justin Granstein

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